Best Disruptive Stocks
What the Heck is This?
What the heck is this?
Well, way back before personal computers and the Internet became pervasive, good stock charts were hard to come by.
For decades, at Cabot, we used chart books published by Securities Research, which were delivered monthly. Flipping through the pages was a great way to find attractive stocks, but with a month between publications, it was hard to stay up to date.
So my father would use a blue ballpoint pen to manually update the charts of stocks he was following closely, writing right in the chart books.
But there was still the problem of following stocks that weren’t in the chart books, stocks of younger, faster-growing companies that hadn’t caught the attention of institutional investors yet.
The solution. We drew our own charts!
And these weren’t just any charts. These were relative performance charts, which showed the performance of our stocks relative to the broad market.
Plus, they were logarithmic charts, so that a $1 move by a $4 stock looked the same as a $10 move by a $40 stock.
Today, I know that many investors have no clue what that means, even if they look at charts. (The easier it is to get something, the less you value it.) But it’s an important distinction, especially if you’re building your own charts.
In fact, we (mainly my father) were so gung-ho on the concept of creating charts that we encouraged readers to build their own. And to make it (relatively) easy, we sold Relative Performance Charting Kits.
The kits consisted of a three-ring binder, a supply of vertical lined paper with no scale, and most important of all, the Relative Performance Scale (made of high-quality plastic), shown in the photo above. We sold the kits for $25 and we didn’t get rich on them, but we did help numerous readers understand the movements of their stocks better, and that’s a good thing.
Today, the only charts we draw by hand are the daily charts of the Market Indexes, Advance-Decline Lines and Two-Second Indicator in our Big Black Book, but that’s another story.
For stock charts, we use WONDA, an institutional-level product offered by William O’Neil and Company, for our heavy-duty work. For light-duty work, the free charts offered by Stockcharts.com are fine.
But if you’d like to try drawing your own relative performance charts, feel free to ask for a scale. We have more than five hundred left!
Seriously, though, the back of the scale has some timeless wisdom. It says:
With this scale …
• You can identify your STRONGEST STOCKS, even in weak markets.
• You can train yourself to stay with your WINNERS and let them grow.
• You will know when to weed out your losers, KEEPING YOUR LOSSES SMALL.
• You can chart relatively unknown stocks, sometimes obtaining SPECTACULAR PROFITS.
The chart-centric philosophy behind this Relative Performance scale is the philosophy behind all of Cabot’s growth-oriented advisories, particularly Cabot Top Ten Trader, which in recent months has had great success in strong stocks like Baidu (BIDU), Boeing (BA) and Buffalo Wild Wings (BWLD). And those are just the B’s!
Moving on, it’s time for my third installment of “Best Disruptive Stocks.”
Ideally, these are companies that address a mass market, and thus have the potential to impact our lives for the better.
Ideally, these are companies that are young and not yet well known or well respected. Thus they have the potential for increased perception by investors as time goes by.
Ideally, these stocks are young and not widely owned. Thus they have the potential to be bought by more investors—especially institutions—and thus see their stocks soar over time.
All the Cabot editors have made contributions to this list of 10, and the stocks are presented in no particular order, though I am trying to feature them when they’re at good entry points. I hope you enjoy them.
Disruptive Stock Number Three
Twitter is one of the 10-most-visited websites worldwide—pretty good for a company that was born less than eight years ago.
Using its software, more than 200 million users send more than 400 million tweets per day—each limited to 140 characters—for free!
And what do these tweets say? Well, most of them might be termed inconsequential, but that’s a value judgment. The indisputable fact is that the business has grown rapidly every year since its launch and there’s no end in sight, particularly with the economic growth that’s expected in China.
The Twitter accounts with the most followers belong to Katy Perry, Justin Bieber, Lady Gaga, Barack Obama, YouTube and Taylor Swift. But anyone can get a Twitter account, and start sending messages into the ether, hoping someone will listen.
(If you want to receive some investing tweets, you can follow me @Timothy_Lutts (though I don’t tweet much) or @MikeCintolo (he tweets more) or our company tweeter @IconoInvestor.
Twitter has also proved very useful at organizing people around social and political issues like the Arab Spring movements and the Occupy movement here in the U.S. The Boston Police Department used Twitter to announce they’d caught the Boston Marathon bomber.
In sum, Twitter is massively disruptive because it’s a free medium of communication with minimal barriers to the user, and it allows organization and leadership of people around shared ideas.
So how does Twitter make money? Just like Google, through advertising, known as promoted tweets, promoted trends and promoted accounts.
In 2010, Twitter’s revenues were $28 million. In 2011, they were $106 million. And in 2012, they were $317 million. 2013, for which we’ll get final numbers on February 5, should total about $620 million. That’s great growth!
The company has not managed to post a profit yet; it’s been too busy growing. But as investment slows down and advertising grows, the potential for earnings is quite large, with profit margins easily above 20%.
What’s most revealing to me today is the chart.
Twitter (TWTR) came public on November 7, just over eight weeks ago.
The price charts shows three weeks of slightly down action, building a short base, and then a very strong advance through December. The whole market was rising then, of course, but a glance at the Relative Performance Line reveals that TWTR was climbing much faster than the broad market, and that’s a great sign.
Since peaking on December 26 at 75, the stock has pulled back normally, and looks to be settling in to support at 55, which might mark a great entry point.
So, you could simply invest in Twitter right here. But if you did, you’d be on your own and there’s a good possibility that some heavy volatility would bring some “uncomfortable” times.
So what I recommend is that you become a regular reader of Cabot Top Ten Trader, which is your source of the hottest growth stocks, and where you’ll not only get expert buying advice on stocks like TWTR—you’ll also get selling advice when it’s time to move on.
Yours in pursuit of wisdom and wealth,
Chief Analyst, Cabot Stock of the Month
Publisher of Cabot Wealth Advisory